Federal District Court Invalidates California Low Carbon Fuel Standard
January 11, 2012
Kurt E. Blase- Washington
Court Decision May Impact Many Other States
In a decision likely to reverberate well beyond California, a federal district court has struck down the California low carbon fuel standard (LCFS) as prohibited by the federal Commerce Clause. Rocky Mountain Farmers Union v. Goldstein, E.D. Cal. No. CV-F-09-2234 LJO DLB (Orders on Summary Judgment issued December 29, 2011). The court found that “the LCFS discriminates against out-of-state and foreign crude oil while giving an economic advantage to in-state crude oil.” It also found that “the LCFS discriminates against out-of-state corn ethanol and impermissibly controls extraterritorial conduct.” Because the state had failed “to establish that no alternative means exist to address their legitimate concerns of combating global warming,” the LCFS is invalid. The court stayed enforcement of the LCFS pending further judicial review.
The court explained these holdings in three orders:
- a response to the Summary Judgment (SJ) Motion of the National Petrochemical & Refiners Association et al., which addresses the crude oil issues (the “NPRA Order”)
- a response to the SJ Motion of the Rocky Mountain Farmers Union et al., which addresses the ethanol issues (the “RMFU Order”)
- a response to the state’s SJ Motion, which addresses the state’s arguments (the “CA Order”)
These are discussed in turn below.1
Crude Oil
The CA LCFS attempts to regulate greenhouse gas (GHG) emissions from fuels by determining a “carbon intensity value” for specific fuel types. The values are based on a “lifecycle analysis” of GHG emissions associated with the fuels, including emissions from extraction, processing and transportation of the fuel ingredients. Use of fuels with higher carbon intensity values is discouraged by the regulatory targets for carbon reduction. The LCFS assigns some California crudes an artificially low carbon intensity value through a grandfather provision, while others were assigned lower carbon values than their counterparts from other states or foreign jurisdictions through the lifecycle analysis. The effect is to discriminate against crudes from other jurisdictions. The state made clear this intent, reasoning that reduced crude oil imports would be supplanted by increased ethanol production in furtherance of the carbon reduction goals of the LCFS.
Relying in part on the U.S. Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2007), the court found that regulation of carbon emissions to reduce global warming within California is a legitimate state concern. In the Commerce Clause analysis, the questions then became: (1) whether the state regulation is discriminatory against out-of-state commerce; and (2) if so, whether the discrimination is necessary to address the legitimate state concern. Because the California LCFS admittedly discriminates against out-of-state entities, the court applied a strict standard of review, explaining that a less stringent balancing test applies when a state regulates in-state and out-of-state entities equally (NPRA Order at 14). As discussed further below, the court rejected the state’s argument that the Clean Air Act authorizes California to violate the Commerce Clause in this instance.
In discussing Commerce Clause precedent, the court explained that states may not “discriminate against an article of commerce by reason of its origin or destination out of State ... The central rationale for the rule against discrimination is to prohibit state or municipal laws whose object is local economic protectionism ... In this context discrimination simply means differential treatment of in-state and out-of-state economic interests that benefit the former and burdens the latter” (NPRA Order at 15-16, citations omitted). The court found that “the design and practical effect” of the LCFS is to favor California crudes and discriminate against out-of-state and foreign existing crude sources. This was accomplished by giving California crudes “an artificially favorable and lower carbon intensity value.” Given the state’s goal of gradually replacing crude-based fuels with alternative fuels, this approach gives a clear economic advantage to California crudes (NPRA Order at 19-21).
Having established discrimination, “the burden falls on the State to demonstrate both that the statute ‘serves a legitimate local purpose,’ and that this purpose could not be served as well by available nondiscriminatory means” (NPRA Order at 21, emphasis in original). As discussed above, the court found the purpose legitimate, but held that the state “failed to establish that they could not achieve this goal through other nondiscriminatory means” (NPRA Order at 22). The state’s expert had testified that a tax on fossil fuels, applied equally to all fuels, could effectively reduce GHG emissions (id.). The state argued that a tax statute would be difficult to pass, but the court replied “that the tax would be difficult to pass does not establish that it is an unreasonable alternative to the LCFS ... the reason the Commerce Clause prohibits discrimination against interstate commerce is because discrimination always will be the more attractive option because it benefits local producers by burdening out-of-state competitors” (NPRA Order at 22-23). The state also argued that a fuel tax would be inadequate because it would not address lifecycle emissions. The court rejected this argument, “reminding” the state that “they may not regulate GHG emissions from fuel production and transportation outside of California” (NPRA Order at 23). “Because other, nondiscriminatory means exist to combat global warming in California, the LCFS must be struck down” (NPRA Order at 24).
Ethanol
Using a similar Commerce Clause analysis, the court also struck down the LCFS because it impermissibly discriminates against out-of-state and foreign ethanol producers by assigning lower carbon values based on location. The LCFS differentiates among ethanol carbon values based on origin (Midwest vs. California) and activities inextricably intertwined with origin (electricity provided by Midwest power companies vs. California power suppliers and interstate transportation) (RMFU Order at13). When comparing plants with the same feedstock and production process, the LCFS assigns a higher carbon value on the basis of origin alone.
The state attributed the difference in carbon intensity values to multiple “scientific” factors that are not based on location. The court found that “while these factors may not overtly discriminate based on location, they do assign favorable assumptions to California while penalizing out-of-state competitors. California is attempting to stop leakage of GHG emissions by treating electricity generated outside of the state differently than electricity generated inside its border. This discriminates against interstate commerce” (RMFU Order at15).
The state argued further that the LCFS takes this approach as “an incentive for regulated parties to adopt production methods which result in lower emissions.” The court held that such an approach “impermissibly attempts to control conduct beyond the boundary of the state” (RMFU Order at 19-20).
As discussed further below, the ethanol plaintiffs also argued that the LCFS is preempted by the renewable fuels standard (RFS) adopted under the Energy Information and Security Act of 2005 (EISA). In an analysis that will be of interest to many trial counsel, the court denied standing to most of the farming and industry plaintiffs on this issue because they failed to respond adequately to discovery expressly ordered by the court for this purpose. On the merits, the court dismissed the preemption claim without prejudice because none of the parties identified or briefed the correct standard of review.
Finally, unlike the crude oil plaintiffs, the ethanol plaintiffs had requested a stay of the LCFS pending judicial review. The court granted the stay pursuant to the usual test.
State Arguments
Clean Air Act Section 211(c) generally preempts state regulation of a fuel or fuel additive for the purpose of motor vehicle emissions control. However, Section 211(c)(4)(B) waives this preemption provision with respect to California. The plaintiffs had argued that the LCFS is not subject to the California waiver, and therefore is preempted by Section 211(c), because it is intended to control life cycle carbon emissions generally and not simply vehicle emissions and fuels. In an earlier order on Motions for Preliminary Injunction, the court had resolved this issue preliminarily in the plaintiffs’ favor. However, in this order the court reversed course and found that the LCFS is a control respecting a fuel or fuel additive and was enacted for the purpose of motor vehicle emission control. Accordingly, the California waiver applies to the LCFS and it is not preempted by Section 211(c) (State Order at 21).
The court also found that while the LCFS is not preempted by Section 211(c), that does not give the state unfettered authority to enact fuel regulations that conflict with other federal statutes. The RMFU plaintiffs argued that the LCFS is preempted by Section 211(o) of the Act, which establishes the RFS as discussed above. The court held that Section 211(c)(4)(B) does not authorize California to enact fuel standards that conflict with the RFS or other federal laws (State Order at 22).
The RMFU plaintiffs argued that the LCFS is subject to “conflict preemption” by Section 211(o) because the LCFS disrupts the national ethanol market and thereby frustrates the intent of Congress in enacting the RFS. The state replied that this is a broad “facial” challenge to the regulation that cannot prevail if any provision of the LCFS can be valid under any set of circumstances. The court rejected this test and also held that the state failed to establish that there is any set of circumstances under which the LCFS does not frustrate the purpose of Section 211(o). (State Order at 27-30). Accordingly, the court rejected the state’s broad defense against the RFS preemption argument, although it did not decide the argument on the merits as discussed above.
Finally, the state argued that by adopting the California waiver provision, Congress expressly authorized California to violate the Commerce Clause because it knew that the California fuel standards would burden interstate commerce. The court held that the state had failed to bear its burden to establish by clear and unmistakable evidence that Congress intended to exempt the LCFS from scrutiny under the Commerce Clause. The waiver provision gives no express authority for California to violate the Commerce Clause, but only waives preemption by federal fuel regulation. The state “failed to demonstrate that when it adopted Section 211(c)(4)(B), Congress affirmatively contemplated and authorized California (i) to discriminate against other states; (ii) engage in extraterritorial regulation of conduct outside of California; and (iii) impose burdens on interstate and foreign commerce that clearly outweigh local benefits” (State Order at 31-32). Accordingly, the state’s request for summary judgment on this issue was denied.
What Now?
The state has appealed these decisions and asked the court of appeals to lift the preliminary injunction. Also, on December 30, 2011, CARB issued Supplemental Regulatory Advisory 10-04B, which essentially retains LCFS enforcement for 2011. For 2012, it replaces the current system with generic carbon intensity values for ethanol and crude-based fuels.
The state also will proceed with a proposal issued in October 2011 to reduce the discriminatory effect of the current LCFS by using more recent and realistic carbon intensity values and eliminating the current provisions that give favorable treatment to in-state fuels. However, the new approach would continue to utilize lifecycle analyses and would rely on “jurisdictional average” carbon intensity calculations that some parties believe would continue the discriminatory effect. It appears that the state will adopt these or similar provisions within a few months and argue that they correct the shortcomings identified by the court should the state not prevail on appeal.
If these decisions stand, they are likely to affect LCFS efforts in many other states, as most are based to some degree on the California regulations. At a minimum, such states will need to look very closely at discriminatory effects against out-of-state suppliers. It also appears that continued reliance on lifecycle emissions analyses will be difficult to justify.
1 The quotes above appear in the NPRA Order at p. 2. In this litigation Holland & Knight Partner Kurt Blase represents the Center for North American Energy Security, one of the plaintiffs in the NPRA group.
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